The Belgian economy is holding up better than expected. In the fourth quarter alone, GDP fell by at least 0.1 percent. “However, we run the risk of ending up in a wage-price spiral.”
For banking economists it was a certainty: Belgium is entering a recession. Even the National Bank had been predicting a (limited) recession for some time. In his forecast that he presented this morning, he discounts that scenario. There will not be two consecutive quarters of negative growth, which defines a recession. Only in the current quarter, which is about to end, there is a contraction of 0.1 percent. “And there is a good chance that we will still have to adjust this figure upwards,” says Geert Langenus, an economist at the SNB. In the first quarter of next year, growth will then be 0.1 percent and 0.2 percent in the second. For the full year, the Bank expects growth of 0.6%, much more than expected by banking economists.
• Inflation will remain high for years to come
Consumers in particular continued to spend more than expected, Lagenus said in an explanation of this favorable scenario. ‘Indicators measuring consumer confidence have shown a huge drop in confidence for months. It was at deep recession levels. This did not match actual store sales at all, which remained stable. Industrial production is also holding up better. The current picture is one of slowing growth, but no real contraction.’ Langenus also indicates that a number of confidence leading indicators are up slightly again. “This indicates that the quarter with the contraction is already behind us.” An 11 percent wage increase for one million employees in January 2023 will give an extra boost to purchasing power, along with the labor market, where unemployment will barely increase. “Companies will not lay off employees quickly due to a shortage in the job market.” Business investments, on the other hand, show a contraction.
Pain points
“The economic news is better than expected,” sums up NBB governor Pierre Wunsch’s estimates, although he quickly added that uncertainty about some forecasts is very high. He also still sees a number of pain points in the Belgian economy. ‘Estimating inflation is particularly difficult. Our models go back to a 20-year period of very low inflation. So making estimates in a context of high inflation is difficult.” In the standard scenario, the NBB assumes that inflation will fall from 10.4% this year, to 4.4% next year and 2.4% in 2024. “Because of automatic indexation, there is there is a danger that our forecasts are wrong and that companies in Belgium pass on their costs much more.As a result, inflation will remain very high, perhaps as high as 10% next year, and wages will continue to rise rapidly. Then we will end up in a dangerous wage-price spiral anyway’, warns the governor.
• ‘Wage increases continue to drive inflation’
It had a number of sticking points. The budget deficit is unsustainably high as it will rise to 5.3% in 2023 and only fall to 4.9% in the next few years. We also have a ‘twin deficit’, because in addition to the budget deficit we also have a current account deficit (= the sum of the trade balance and the balance of assets) of 5%. This is partly due to the cheap euro and expensive energy, but also to the loss of competitiveness because our wages are rising much faster than in neighboring countries due to the automatic index. In 1922 and 1923 they grew faster by 5.6%. Over the next two years, this would stabilize somewhat in the most favorable scenario, but the handicap would still be 2.3% higher than in 2021.
